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The FAANGS Bite

The big tech firms may have dropped but it could still be time to invest.

Article updated: 28 November 2018 9:00am Author: Sheridan Admans

Investing in tech

Western tech giants such as Facebook, Amazon, Apple, Netflix and Google (FAANGs) have experienced some share price slippage in recent months after years of eye-watering gains. Whether this is the start of a trend, a protracted correction or just part of a broader pullback, only time will tell.

We have long been advocates of investing in tech but since mid-2017 many market commentators have voiced concern over the sector’s valuation, in particular the valuation of the tech giants. While some have argued that high P/E (a simple, yet widely used measure to value a company) values do not give a true picture of some tech companies once the cash on the balance sheet is stripped away, others have highlighted that some tech giants are investing in opportunities that have lower margins of returns. For example, Amazon has recently moved into the grocery business, which has the potential to reduce its historically high growth levels.

Broadly speaking we continue to see long-term value in technology companies across market caps, but we try and look beyond the confines of technology sector definitions. And when identifying these opportunities we look for managers that utilise the technology, seek companies that utilise the technology, or rely heavily on it, or is its primary revenue source of the company they are investing in.

When we refer to technology we are primarily focused on disruptive algorithmic software, mechanical devices, power storage and deployment, and networks.

Why do we consider technology in this way?

We are of the view that technology and society are co-dependent and co-influence each other. A synergistic relationship, which reaches into all aspects of our lives, has been a key component of humankind since time immemorial. By limiting our focus to companies that primarily develop, manufacture or provide technology services, opportunities can be missed. Opportunities such as companies that harness technology to automate more repetitive tasks, make smarter business decisions, improve the customer experience, improve collaboration and gain insight to improve the decision-making process. This can mean investors missing out on the most efficient oil extraction company, the best platform for selling homes, or the best healthcare business which can tailor its medication to specific DNA makeup for example. Missing these opportunities, can mean you forgo having a well-diversified technology portfolio.

Companies that integrate technologies into their fabric are likely to enjoy a period of sustained growth opportunities that better optimise resources and outcomes. Identifying these companies is going to be the tougher bit for some investment managers. On top of the valuation issue, the criteria used as justification is likely to remain in debate for some time to come, as investment managers discuss the value of some of these businesses based on the potential for growth in their future cash flows.

We attempt to identify managers that don’t focus too narrowly and so offer less diversification, as dictated by index sectors. However, we don’t necessarily rule out index exposure; if we believe holding a sector index is the best way of expressing our view on parts of the market, we are comfortable doing so, provided it fits with our bigger picture view of tech. We believe there is a long-term opportunity to enhance, empower, and make processes more efficient or improve the probabilities of better outcomes, which new technologies can offer.

Fund managers investing in tech in line with our perspective on the sector

Woodford Patients Capital Trust – The trust gives the manager flexibility to continue to invest in early stage disrupters and knowledge-intensive businesses, some of which will be more relevant in 10 years’ time.

Merian Chrysalis Investment Company - The Company’s investment objective is to generate long-term capital growth through investing in a portfolio consisting primarily of equity or equity related investments in unquoted companies. The capitalisation of which will be small to mid-size. BE AWARE that this investment trust only launched in early November and is not currently fully invested. Its initial investments are expected to be in three companies whose use of technology allows them to reach a wide audience in online health and beauty, foreign exchange and luxury hotel rooms, making their business vastly scalable and competitive.

Smith & Williamson Artificial Intelligence - The fund aims to achieve capital growth by investing in companies engaged in the development and/or production of artificially intelligent systems (such as smart applications on phones) or products (such as sensing technology). These enable third party entities (such as online retailers, online auction houses or online travel agencies) to sell or deliver their products and services through an online platform. The fund also invests in companies which produce, develop or deliver products and/or services that have an artificially intelligent component which can enhance an existing product or service (such as artificially intelligent technologies that are embedded in insurance applications to provide more accurate underwriting standards and rates).

L&G GO Ucits Solutions Robo Global Robotics and Auto - The ROBO Global Robotics and Automation UCITS Index constituents are either classified as "bellwether" stocks, which are companies the majority of whose business is related to robotics and automation; or "non-bellwether" stocks, which are companies that have a distinct portion of their business involved in robotics and automation. The Index allocates 40% to "bellwether" and 60% to "non-bellwether".

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read ourInvestment Research Policy.

Sheridan Admans

Investment Manager

Sheridan co-manages our TC Share Centre Multi-manager funds and heads our team of research analysts. He is a chartered wealth manager and qualified financial adviser, and his qualifications include the Securities & Investment Institute (SII) Diploma and an MBA in investment analysis.

Please remember

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